How the Crypto Crackup Could Get Much Worse

Cryptocurrency markets, after months of relative calm, are melting down all over again. Bitcoin crashed through its longtime floor of $6,000 and digital tokens of all types fell more than 10% in the past week.

The one exception has been so-called stablecoins, virtual currencies designed to maintain a fixed value of $1. In theory, they should be a safe haven from the larger crypto carnage. But will they hold up?

So far, the stablecoin situation has been reassuring. Three of the biggest—Paxos, TrueUSD and Circle-backed USD Coin—are actually trading a cent or two above $1. That’s the good news.

The bad news is the largest stablecoin of them all, Tether, is flashing a giant warning sign. As the Financial Times’ blog Alphaville notes, Tether has been “breaking the buck” since October and is currently underwater at 98 cents.

In theory, this shouldn’t happen. That’s because, if Tether is truly worth $1, arbitragers will swoop in and quickly drive it back to its baseline price of a buck. That’s not happening, which means something is wrong.

Word that something is fishy about Tether will not be news to anyone familiar with it. Critics have long decried the refusal of the Tether team to provide a proper audit to prove they are backing the currency with real dollars. And now come reports that its new banking partner, Bahamas-based Deltec Bank, is a dodgy outfit accused of money laundering.

More troubling still: Bitfinex, a cryptocurrency exchange tied to Tether, appears to have put in stiff new withdrawal fees for large investors that want to cash out their crypto holdings. As cryptocurrency blog News BTC notes, folks are already asking if this move is intended to halt a full-blown run on Tether, which is reportedly under attack from speculators.

All of this raises the question of what happens if another speculative attack proves nothing is pegging Tether to the dollar, and the price goes into free fall. If it turns out the true value of Tether—currently the eighth biggest cryptocurrency—is 75 cents or 50 cents or less, it could deliver a shock to the crypto markets that makes this week’s wipeout look like a hiccup.

The bright side is other stablecoins do appear to be backed by dollars on a one-to-one basis. Still, they are hardly a great place to park your money. At a time when even a simple savings account can earn you 2%, stablecoins pay nothing in the way of interest. What’s more, there are transaction fees to acquire them and, right now, the respectable ones are trading for a cent above the dollar.

All in all then, stablecoins sound a rotten investment—unless, of course, you compare them to the rest of the crypto market right now.

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